The market will try every trick in the book to make you lose money.
The tricks change. The one thing you can count on is that they're always the ones you don't expect.
It may seem weird to talk about the market that way. An entity that moves unexpectedly, with intentions to take your hard-earned money.
But that's the way you have to look at it. Stay open minded and flexible.
Do not build an adversarial relationship with the market and go on tilt. Dance in sync.
Easier said than done.
Last night was a whipsaw
On October 3rd, the market closed weak. Futures went up almost immediately after hours.
Then the midterms happened and futures tanked. Talk of data centers in Texas and the rest of it.
Then the overnight session sent futures sky high.
Then pre-market sold them off again.
I'm getting dizzy just thinking about it. What a tough dance to keep up with.
Then at the open, the QQQ and AI stocks, which had been swinging together all night, split apart. The Q's finished up 1%. AI stocks sold off across the board.
Weird day.
Good trading is easy
The best trades are the easiest trades.
You see the setup. It calls you to it and immediately tells you that you're right.
That's when you know you're in your environment.
I know that sounds like vibes, but it is a real skill. You have to know your system well enough to understand the feedback the market is giving you. That is the crucial part of trading.
I am not feeling that confidence in this market yet.
The SPY and IWM were up on the day. Surprisingly, the Dow lead the day. The QQQ, my primary index, lagged. This is not my environment.
My sweet spot is strong growth names setting up and moving higher. There are very few right now. It's hard to see the baseball.
So you don't force it.
Growth is underperforming
Blue chips led the action today. Consumer staples, consumer discretionary, financials and healthcare were all strong. Defensive names and consumer names.
Amazon, McDonald's and Home Depot all had strong moves higher. The market is voting on the consumer.
Tech is lagging. I primarily watch tech stocks because that's where growth lives: growing earnings and growing sales.
The QQQ is on day two of a rally attempt. A rally attempt starts the first day an index closes up after a low. A follow-through day, the signal William O'Neil's system uses to confirm a bottom, can only come on day four or later. The wait is very much intentional. It gives the market time to prove itself.
Today the Q's ran into resistance at the falling 10-day moving average and closed near the low of the range. Not convincing.
The gap down from last week hasn't been filled.
The Q's closed at 692. The 21-day is around 714. About 3% below.
We just came out of two to three months of chop. The V-shaped rally in April is fresh in everyone's mind, so nobody wants to be left behind again. That's how you get in too soon and get chopped. In a choppy market, swing traders get cut to pieces.
Better plan: Make the market earn your money.
Master your index first, and the stocks will come
The best way to outperform the market is to lose as little money as possible when the market goes down. The index is the benchmark you are competing against.
Defense wins championships.
If you can only master one chart, master the index that matches your strategy. I'm a growth investor and a swing trader. For me that's the QQQ.
Buy the market first. Once you're in and participating, the stocks come to you: breakouts, or pullbacks, which are even better. Don't force it.
You can find initial exposure to the market with a plain index ETF. If you're experienced, you can use a leveraged one. TQQQ is a 3X ETF that I use for this strategy.
I scale into it with the same three steps from last week's post. I use the 21-day exponential moving average, an average of the last 21 closes that weights recent days more. This is a strategy I learned from Mike Webster at IBD.
One close above it.
Then the low above it.
Then three lows above it.
Scaling out of the trade is the same thing in reverse. A close below, I sell a third. A high below, another third. Three days with highs below and I'm fully out of the trade.
Triple up also means triple the downside. Good sell rules are what make this work. You can never freeze.
I keep it as the cornerstone of my strategy. 20% to 25% of the portfolio, growing to a max of 30%. The rest goes into individual stocks.
You trade it less, and that is by design. You have less individual stock risk, fewer gap downs and nasty breaks.
Right now, I'm about 90% cash, with small shorts in the Q's and one AI stock.
You do not need the low. There is no one stock you have to buy or your whole year is ruined. That's FOMO.
You need to catch the trend, not the low.
Watch the market
Stay in tune. Let the market earn your money gradually. Every rally attempt has to prove itself, and the time it takes is the point.
Every weekend I cover a broad and targeted watchlist in the Sunday trading plan.
Trade safe. Use stops. See you next time.